Sebi changes SLB mechanism, extends lending tenure

The regulator also set guidelines on corporate actions like dividend declaration, bonus issues and stock splits, which could take place when the stock is lent out. In case of a dividend declaration, Sebi says, 8220;The dividend amount would be worked out and recovered form the borrower at the time of reverse leg and passed on to the lender.8221;

And when there is a stock split, the positions of the borrower would be proportionately adjusted so that the lender receives the revised quantity of shares. In case of other corporate actions like bonus issues and amalgamation and open offer, the broad guideline states, 8220;The transactions would be foreclosed from the day prior to the ex-date. The lending fee would be recovered on a pro-rata basis from the lender and returned to the borrower.8221;

Sebi had earlier expressed its disapproval to the foreign institutional investors FIIs lending shares for short sales purpose in the overseas markets. The regulator had also mentioned that they would be working on strengthening the domestic SLB scenario. It was in April this year that the new SLB framework became operational, but there were few takers for this. This was also one of the reasons why overseas investors preferred to have short sales transactions in the over-the-counter OTC market overseas.

The lack of popularity to the SLB was due to various reasons. Prime amongst them was that the lending mechanism was only for seven days, hence somebody who wanted to go short on particular scrip, had to return the borrowed shares in seven days. Regulations do not allow for 8216;naked short sales8217; wherein speculators can sell shares that they don8217;t own. In naked short selling, they could take a short position in the market and on the day of delivery, pay the difference to settle the trade of carry the position forward, as was in the earlier badla days.

However, it is the margining involved in short sales that was a sore point for many participants. Unlike the cash market where there are three margins and futures and options where there is a fixed margin, there are five types of margins levied on trades in the SLB segment.

The problems

8226; Lending mechanism was only for 7 days. Going short on a scrip, meant returning borrowed shares in that period

8226; Regulations did not allow for 8216;naked short sales8217; where speculators can sell shares they don8217;t own

8226; Unlike cash market three margins and futures and options fixed margin, there are 5 types of margins levied on trades in SLB segment

The alterations

8226; Exchanges and depositories to extend tenure to 30 days

8226; SLB timing extended to normal trading hours of 9:55 am to 3:30 pm from the present trading window of just one hour from 10 am to 11 am

8226; New guidelines on corporate actions like dividend declaration, bonus issues and stock splits, which could take place when the stock is lent out

8226; When there is a stock split, position of the borrower would be proportionately adjusted so that the lender receives the revised quantity of shares